Good day and thank you for standing by. Welcome to Concentrix's Fiscal Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Stein, Vice President of Investor Relations.

Thank you and good evening. Welcome to the Concentrix second quarter fiscal 2023 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward-looking statements that address our expected future performance and that by their nature address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to today's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K. Also during the call, we will discuss non-GAAP financial measures, including free-cash flow, non-GAAP operating income, adjusted EBITDA and adjusted EPS, as well as adjusted constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President and Chief Executive Officer and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy and Andre will cover our financial results and business outlook. Then we'll open the call for your questions. Now I'll turn the call over to Chris.

Thank you, David. Good evening, everyone, and welcome to our second quarter earnings call for fiscal 2023. During the quarter, we received many investor questions about the impacts of the ongoing macroeconomic environment, the status of our transformative combination with Webhelp and the emergence of generative AI technology. I will provide a briefed update on each of those topics today. I would also encourage those listening to download our updated ESG report from our website that we just released. Now, let's begin with our Q2 results. While we were disappointed in not being within our guidance, I am pleased that as a team, we did grow and drive margin expansion and strong cash flow in the quarter, despite the fact that certain clients saw volumes that were well below their expectations entering the quarter. Reported revenue in the second quarter was $1.6 billion, up 3%. On an organic constant currency basis, revenue grew by 1.6%. Our second quarter non GAAP operating income improved to $221 million , growing 3.6%. Adjusted EBITDA increased 3.5% to $259 million compared with last year and both our non GAAP OI and adjusted EBITDA margins were up 10 basis points over last year. This reflects our ability to manage our cost structure dynamically when volumes from clients are lower than their expectations. Non GAAP EPS was $2.69 per share compared with $2.93 per share last year, largely reflecting the expected impact of higher interest rates. While we continue to see volume softness we also experience relative strength across certain strategic verticals, particularly with clients in the healthcare, travel, insurance and certain parts of our technology portfolio. The volume softness that we have seen in recent quarters in the retail, e-commerce, consumer electronics and telecom industries continued and in some cases intensified with certain clients despite…

Thank you, Chris, and hello, everyone. I'll begin with a look at our financial results for the second quarter and then discuss our business outlook for the third quarter and the full year 2023. We delivered revenue growth and margin progression in the second quarter. Revenue in the second quarter was $1.61 billion, up 3% on an as-reported basis. The improvement in reported revenue includes a 1.6 point negative impact from foreign currency fluctuations and a positive 3% impact from acquisitions. Organic constant currency growth was below our Q2 expectations for the quarter at 1.6%, a reflection of certain clients having lower volumes than they expected. The shortfalls to volume expectations were most pronounced with a few large clients in the communications and consumer electronics verticals and a number of clients across our retail vertical. In Catalysts, we saw client spending reductions and the change in the large project that Chris mentioned earlier. In terms of client verticals, we grew in each of our four strategic verticals in the quarter, with revenue from health care clients leading the way, growing by approximately 11% on both an as-reported and organic constant currency basis. Revenue from retail, travel and e-commerce clients posted 4% growth as reported and 6% on constant currency organic growth as strong growth continued with travel clients. Revenue from banking, financial services and insurance clients grew by 2% on a reported basis and 4.5% on an organic constant currency basis. Revenue from technology and consumer electronics clients grew 8% as reported and about 1% on an organic constant currency basis. Revenue from communications clients decreased by 6% as reported and on an organic basis. Revenue from clients in the other vertical decreased 8% as reported and about 7% on an organic constant currency basis in the second quarter, driven…

Thank you. [Operator Instructions] Our first question comes from Vincent Colicchio with Barrington. You may proceed.

Yes. Thank you for taking my questions. So Chris, part of your guidance, it looks like you're expecting a meaningful pickup in sequential growth in Q4. What is driving that?

So Vince, as we talked about earlier, we do have two large contracts, one that we talked about in Catalyst, which will not ramp. The other one is at plan and has confirmed kind of ramping as we expect a plan for the rest of the year. As we talked about, that's a fairly big driver of the growth that we're seeing within Q4. And then also as we looked at the areas that are growing, they continue to grow. We've looked at obviously muting the expectations of the clients who have not been able to kind of meet their volume expectations that they've had, so that's partly offset. But when you put the two together, that gives us what we're seeing within the fourth quarter as you look at the guide for the year. .

Yes. I think one fairly sizable difference versus last year is our expectation. As I said, that we expect to see sequential growth within Catalyst quarterly as we go through the back half of the year. So that is different than what we were experiencing last year, and we'll kind of be the thing that makes this year's pattern look different than last year. Other than that, pretty much the same as last year's pattern.

And in terms of the vendor consolidation discussions, I think you may have touched on this, but what portion of the amount that is not coming in this year do you think you may see in the next fiscal year?

So Vince, to be honest, it's difficult to answer. What we're having is sort of positive conversations. We've clearly won a bunch of the vendor consolidation business, although it's coming in at lower volumes. But we have a number of clients who are kind of sitting on the fence, so to speak, and saying, look, if we continue to see the depressed volumes that we're seeing, we're definitely going to have to consolidate, but those -- pulling the trigger is taking a little longer than expected. We are not anticipating anything meaningful in the next two quarters from a vendor consolidation perspective outside of ones that we've already been given and are ramping and are dealing with. I suspect that will roll into next year and probably the most appropriate time to talk about that is when we close the Webhelp combination and then kind of give a guide for what we see in the back half of the year -- sorry, front half, back half of next year.

And then one last one. The -- your strategic verticals are performing quite well. Should we expect that to continue in the second half? And the weakest, I think, of the four is the technology and consumer electronics side, should we expect that to continue?

Yes. So Vince, on sort of health care and some of the others, banking insurance, you'll see what we foresee is that kind of continued sort of strength in the back half of the year. Consumer electronics and technology is a tale of two cities. Consumer electronics, we continue to see, frankly, as Andre called out, some of our larger clients suffering some fairly big volume declines within that space. But that's offset by some of the technology space that we've seen, some very good, strong growth. And we expect to see probably that continue on in the back half of the year with continued muted consumer electronics, but some good strong growth in the technology side.

Okay. I’ll go back in the queue. Thank you.

Thank you, Vince.

Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. You may proceed.

Hi. Thanks for taking my questions. Chris, revenues in fiscal 2Q grew 1.6% in constant currency, whereas you had expected it to grow 3% to 5%. You are guiding 3Q to 2% constant currency growth, you're taking down the full year from 5% to 2.5%. I guess my question would be, what is the market growing at based on your estimate? And what gives you confidence that revenues can't be weaker? I mean, why is 2.5% the right number? And what is giving you confidence in that?

So Ruplu, a couple of different things. I'm not sure we are hearing different market growth numbers, frankly, and it's more based on region and by industry. And so for instance, we see Europe growing faster. We are experiencing that ourselves. Clearly, other public companies who have large European exposures are seeing that versus what sort of North America is growing. And similar, we're seeing some good growth in Asia Pac and some public companies that are exposed to that are seeing the same things. So it's a bit of a mixed bag. What will tell you is, we feel that -- and what we're hearing from our clients is, we're keeping, if not growing our share across the categories that we're in and competing in and the business that we're competing in. So we feel good about that. That's probably the big takeaway from all of it. In terms of how we've looked at the back half of the year, when we looked at our Q1, we came in at the higher midpoint of the guidance. And we said within Q1 that we had some clients who were forecasting lower and delivered way more. We had some clients who were forecasting more and delivered less. And we've had that similar experience in Q2. The difference is that, we're seeing some of the clients that Andre pointed out, sort of retool their infrastructure for lack of a better term, in terms of what they're actually outputting into the marketplace. And when we see that, we tend to kind of feel like they've reached the position of stability in terms of what their expectations are, and it's muted from what we originally anticipated. And so, as we've gone through and looked at our Q3 numbers and expectations for full year, we've…

Okay. For my next question, let me ask you about the new economy clients. I mean, this set of clients was growing 47% year-on-year three, four quarters ago. I think you said they grew 2% year-on-year this quarter. So what are you hearing from them? Any idea when this set of clients can turn around? Do you think this is like is another one to two quarters so weakness? Or what is your take on when this set of clients can see stronger growth?

Yes. So Ruplu, great question. I think you have to peel back the onion a little bit on these clients. Where we're seeing weakness in this portfolio of clients is, as Andre pointed out, primarily crypto year-on-year, which is now de minimis to us kind of going forward. And then also in some of the fintechs. And to be more specific, we are seeing weakness in North American-based direct-to-consumer fintechs which have dramatically kind of cut back their customer acquisition and spend and are more focused at kind of driving frankly, real tangible, profitable returns. And I think when you look at that combination, that's about a 5% headwind, which obviously will lap next year. So my expectation is that we'll continue to see muted performance within this portfolio of accounts, probably until the back half of the year, early next year when either they start to spend more to expand or obviously, economy might turn around and/or we continue to add clients into that portfolio, which we're doing.

Okay. Let me ask Andre a question. So Andre, the operating environment is weaker. I mean revenue growth is lower. You're taking on a lot of debt for the Webhelp acquisition. So talk to us about what is giving you confidence in being able to service that debt? And as part of that, if you can weave in some of the margin drivers and what your expectations are for cash flows and why you think that those can sustain.

Yes. So one of the things that's really great about this business, Ruplu, through cycles is how it generates cash. And I go back as far back as -- in this industry as far back as the global financial crisis and the participants even back then when revenues were soft, we're able to drive really strong free cash flow. So it really starts with our ability to have a very variable cost base so we can quickly react as we did in this quarter to preserve margins. I think the other margin drivers as we go forward will be, again, getting into higher value services, including now higher-value services around helping our clients implement generative AI. Obviously, we can still get some leverage on our G&A as we grow even at these muted levels. And then we add in, you mentioned the Webhelp and taking on the debt there. We add in Webhelp, generate strong free cash flows and then the synergies from that transaction kind of on top of things, which will be accretive both to margins and to free cash flow. So all of that has us very, very confident even at the increased interest rates that we can generate strong free cash flow, such as we are, frankly, in the Concentrix business this year, we'll be able to do it even more so on a combined basis with Webhelp and with synergies and pay down debt. We've demonstrated our ability to do that in past transactions, the conversion transaction, the PK transaction, and we've hit the targets we've set for ourselves, both in terms of synergies, but more importantly, getting our debt levels down and getting down, frankly, more quickly than we indicated we would at the time that we did the transaction. I feel very confident with Webhelp, we'll be able to do the same.

Okay. Let me ask one last question. From the prepared remarks, it sounded that like Webhelp had stronger growth. I think you mentioned something about 8% year-on-year constant currency. Was that right? And why do you think that is? Is it a difference in geographies that's causing that? It just sounded that they had better performance. So what do you attribute that to?

Yes. So what we said was on like-for-like constant currency basis, low double-digit growth. And so that's the growth rate in the first quarter. That is above expectations that Webhelp had for the quarter or that we had based on the diligence that we did. What we've built into our model for this year is 8% to 8.5% growth in the Webhelp business. So we remain very, very confident that they can deliver that. This really speaks to the quality of the asset here that we're combining with their strong footprint in EMEA, particularly with nearshore and offshore offerings supporting European languages as well as the very, very strong operations and strong growth that they're seeing in Latin America. If you look at kind of one of the rationales for this combination. If you look at other public peers who break out their revenue growth rates by region, Europe is growing quite well as is Latin America. And frankly, we're growing well there as well, but we are subscale. And so, that's what I would read into their results, and it's why we're so excited about completing the combination, the great progress we're seeing on the integration and then moving forward together.

Okay. Thank you for taking my questions. Appreciate it.

Sure.

Thank you. [Operator Instructions] Our next question comes from Joseph Vafi with Canaccord Genuity. You may proceed.

Hi, guys. Good afternoon. Thanks for taking the questions. Maybe just a couple ones based on your comments, Chris, on the AI front. Could you maybe perhaps give us a little more color? I know you mentioned cost being a factor in the technology and its implementation versus potentially other solutions. I think it'd be interesting to hear what -- it's early days, but the cost of some of this technology versus maybe traditional servicing of those volumes. And I have a couple of follow-ups.

Yes, for sure, Joe. So traditional and even sort of the, I don't want to call it traditional AI, but the AI that we've deployed, that's more machine-based learning or natural language processing, generally, the cost model is based on per seat, per license per current transaction and doesn't necessarily have to deal with the type of transaction or the length of transaction that is being incurred. So for instance, asking a very simple question to having a back and forth at last 10 minutes, generally the same price and you get some variability out of that. The way generative AI is currently priced in the way the models work is that, you actually pay per sort of, and I'm very simplifying this, for character that you're asking it to do and back and forth. So longer queries take more time, take more money and cost more that kind of goes back and forth with it. Plus, as you look at the proprietary information that you're uploading into the cloud for a storage perspective, you're paying for the storage that kind of goes along with it. Then you're paying for the technology licenses, the technology deploying to kind of give that last mile application to the client. So there's a lot more costs associated with it. And so for some transactions or some productivity gains and proficiency gains that makes sense. For others, it doesn't, because you don't get the benefit of it. The real conversations we're having with clients around generative AI right now though, cost is one factor, but it's more about predictability of results where if -- it’s not one or two questions coming up with the same answer. It's like if you ask a 10,000 questions, does it come up with the same answer? Or does…

Yes. Fair enough. And then we've seen some of the other players, I guess, in the broader ecosystem, maybe especially also over in the IT side of things kind of announced like major AI investment initiatives of their own internally to build the practice up. Is that something that makes sense for Concentrix to do and kind of earmark real material budget for this stuff at this point? Or is it really a function of helping clients on their journey and maybe spending on investment there as it comes along?

Yes. Joe, that's a great question. The reality is, a lot of press releases, I think, are somewhat misleading around where the spend is going and what it's for. The reality is that, we are building up the practices pretty aggressively as we speak. It's an extension of learnings we already have. The investments that we have put into Catalyst are significant, and that gives us the ability to scale sort of the proof of concepts much faster into production. And as a whole, as a company, we spend tens of millions of dollars on R&D in our own technology and development. That has been slowed down or stopped or anything like that. We continue to see that as critical investments for our future. And so, I think we're at the right investment level and we'll continue to ramp it up as we drive more and more into production and win more and more business around it.

Fair enough. And then just one final one on the large Catalyst project that's been -- I guess is it fair to call it delayed and not canceled at this point? And then, is there any kind of view as to -- if it's just delayed, when it may start to ramp again? Thanks a lot guys.

Yes, Joe. No problem. Just for clarity. We won this project back, and I'm sad to say, in sort of Q3 of last year. And the original plan from the client was to kind of get to full production in Q2, Q3 of this year. And the reality is, as we staffed up fairly heavily. And the work for it started trickling in, and we started doing work for it, and we continue to do work for it. But the big bank for lack of a better term, when they wanted all the scrum teams and all the work done just continue to get pushed out and various reasons, they were doing a restructuring, they were aligning to a new technology stack, et cetera, et cetera, et cetera. And really, it within the last couple of weeks that they sat down and said, hey, we need to continue this. We need to get this done. We need to continue to support the stock, but we just are going to push out the budget for sort of large-scale ramp and implementation that we both were expecting for sort of our Q3 and Q4. So it's not canceled. We are getting revenue from it, but it is a much lower run rate. And it will frankly, push the project out further, but at this much lower run rate versus what we had expected. So that does have a fairly big impact to us as we called it out from a size-wise perspective for the back half of this year. I do not expect that in the front half of next year, it will come back in a meaningful way. I think it will continue to kind of slowly increase as the client kind of aligns budgets, and it comes back on to be a priority. But it's absolutely not canceled, it's still there, and we're still billing for it just at a much reduced rate.

Yes. And as we talk about the sequential growth that we expect in Catalyst over the back half of the year, it is not really a major contributor to that at all at this point in our expectations. What we are seeing are some nice smaller wins that are helping catalysts for a stabilized revenue and then begin to grow as we expect it to. It actually grew slightly sequentially in Q2, and we expect that to accelerate a bit in Q3 and even more in Q4. But again, not based on that large contract but on a bunch of other smaller wins across the verticals. .

Great. Thanks, Chris. Thanks, Andre.

Thank you very much.

Thank you. And I'd now like to turn the call back over to Chris Caldwell for any closing remarks.

Great. Thank you very much, everybody, for joining us today. We always very much appreciate your interest in Concentrix, and we're committed to maintaining strong profitability and cash flow generation, especially when executing our strategic objectives. We look forward to talking to you next quarter. Thank you very much, everybody. .

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.